High tax burdens, rigid labour laws, barriers to competition, and slow innovation dynamics weigh on growth. Inequality has grown since the 1980s, and high unemployment is hurting the young and the most vulnerable, weakening public support for the EU project. The EU 2020 strategy, the European Semester and the Horizon 2020 initiative have been designed to support growth and innovation, but have not succeeded noticeably so far. While significant structural reforms have been implemented in some European countries, deeper reforms in more countries would raise growth on a sustainable basis. To ensure inclusive growth, social, employment and environmental impacts of reforms should be systematically assessed and spill-overs fully incorporated in the European Semester process and in adjustment programmes. National ownership should be strengthened, and significant hurdles for innovative firms should be removed. Regulatory costs of EU origin should be further reduced.

Reinvigorating the Single Market

Implicit barriers between EU countries restrict the circulation of goods, services, people and capital. The heterogeneity of rule settings across EU countries makes it hard to adapt to each national regulation. Unjustified and disproportionate restrictions to the cross-border provision of services and to the establishment of businesses should be eliminated. Automatic recognition of qualification should be developed, and disproportionate national barriers related to regulated professions eliminated. Physical networks could be better connected across countries. Finally, there is room to lower external barriers to trade, which would enhance competitive forces, boost productivity and encourage innovation.

Towards a low carbon economy

Progress towards a low-carbon economy in Europe should remain a priority going forward. The European Union Emission Trading System (ETS), a pioneering market to curb greenhouse gas emissions, has been affected by depressed carbon prices during the crisis failing to provide the financial incentives for adaptation and innovation to reduce carbon emissions. Lack of legally binding longer-term targets, narrow coverage of the ETS and some expensive subsidy programmes should be rethought as they have undermined the economic effectiveness of climate change policy. Finally, the electricity infrastructure is not well adapted to support the change in energy mix needed to meet carbon emissions targets. Ownership unbundling of generation, supply and network activities within vertically-integrated electricity utilities, and streamlining permit procedures would support electricity grids investment.